Much of the wailing and gnashing of teeth over the suddenly-close race in Massachusetts has to do with the possibility that it will further delay, or even derail, the health-care reform package. The main features of that package, we are told, are the provision of affordable health care outside of employee benefits and a reduction in health-care costs. I don’t know enough about the bill to say whether or not it’s likely to deliver either (although evidence that the Senate bill gamed its CBO evaluation rather egregiously makes me suspicious on the second point), but in any case we need to know what’s going on now in order to tell whether the Senate bill is going to make it any better.
First of all, we have a link to a paper on employer-based provision of health insurance:
- Understanding employer-based health insurance (The Incidental Economist)
Mr. Frankt Frakt (d’oh!) notes:
A high-level take away is that marrying health insurance to employment introduces a vast amount of variation on who is offered and takes up what. Details of health insurance offers, plans, enrollment, and allocation of premium payment between employer and worker have more to do with firm strategy, the profile of a firm’s workers in several dimensions, and the market for labor than about health.
This is just one reason why I break out in hives every time someone tells me that health insurance “proves the free market doesn’t work”.
The paper itself is Modeling Employer Decisions to Offer Health Insurance by Sherry Glied and Joshua Graff Zivin. Happily, it’s not gated. Looks like a good read.
Next, Greg Mankiw points us to an article on the rising costs of health care:
- For ailing health system, a diagnosis but no cure (New York Times)
First, the problem:
What afflicts the American health care system (and those of other industrialized nations) is called Baumol’s cost disease. It is named for William J. Baumol, an economist at New York University, who turns 88 next month. And it explains why health care costs will almost certainly continue to rise faster than general inflation, and why Democrats might not want to set expectations too high when it comes to their health care bill.
Then, the supporting theory:
Their point was that some sectors of the economy are burdened by an inexorable rise in labor costs because they tend not to benefit from increased efficiency. As an example, they used a Mozart string quintet composed in 1787: 223 years later, it still requires five musicians and the same amount of time to play.Despite all sorts of technological advances, health care, like the performing arts, suffers from the cost disease. [...] While some industries enjoy sharp increases in productivity (cars can be built faster than ever, retail inventory can be managed better), endeavors like health care are as labor-intensive as ever.
And yet, wages in health care grow to match wage increases in the broader economy. (Imagine trying to pay today’s violinist the same as a counterpart in 1787.)
All of this happens invisibly, but the proof is in the budget ledgers of local, state and federal governments. Cost disease helps explain why low-income Americans can now afford flat-screen televisions that were out of reach a decade ago, but health insurance that was unaffordable in January 2000 remains unaffordable in January 2010.
At the same time, demand for health care never lets up. So while slow sales of video games or clothing can reduce prices, health care prices never ease.
Mankiw also offers a simpler (and complementary) suggestion:
Note that the above graph plots percentages, not absolute figures. (It could be that, adjusting for inflation, Americans pay more out-of-pocket now than they did in 1960.) But the point is well-made: it’s likely that one cause of increased health care spending is that more and more of that spending is indirect — out of sight, out of mind. People probably don’t connect higher taxes (or higher deficits) with increased (government) health care spending, and I’d be shocked if anyone besides Russ Roberts and Don Boudreaux connected raises, bonuses, and new ventures that didn’t happen with increased (employer) health care spending.